Tag Archives: income

Which Other Utilities Are In The Same Class As Southern Company?

A few days ago, I wrote an article on the reasons why I am still buying utility Southern Company (NYSE: SO ) and received an interesting comment. A reader asked what other utilities have the same quality attributes as SO: “Which other utilities are in the class of SO?” The most comprehensive answers is: It all depends. It depends on what criteria is being used to classify SO. Is it by S&P Quality Rating for 10-yr consistency in earnings and dividend growth? Is it by level of credit support offer by the governmental regulatory bodies? Is it by earnings yield, dividend yield, PEG ratio, ROIC, or some other fundamental comparison? Is it a combination of all the above? The criteria used should depend on the risk portfolio of the individual investor and on his/her goals and specific strategies to reach those goals. Let’s begin with arguably the easiest to research: S&P Equity Quality Rank. The Quality Rank groups companies based on their 10-yr consistency in earnings and dividend growth, with A+ being the highest and B+ considered average. Out of the 2,802 companies with equity ratings, only 2% fall into the top category and 10% are considered above average at A- and higher. A+ Highest 2.2%; 38 companies A High 2.9 %; 84 A- Above Avg. 5.6%; 159 B+ Average 16.8%; 473 B Below Avg 22.1%; 621 B- Lower 26.9%; 755 C Lowest 23.9%; 669 Most utilities are rated by S&P Capital IQ and their reports are readily available from most brokerage accounts. For example, I have access to a fidelity.com brokerage account offering a stock screener including the Quality Rankings as an option. Of the 137 utilities identified by S&P, 78 have an Equity Ranking; 3 are rated A+, 8 are rated A, and 19 are rated A-, with 48 rated B+ and lower. One of the criteria for a Ranking is a 10-yr trading history, and some utilities have recently restructured and have not achieved this minimum review period. Southern Company is rated A-. Below is a listing of utilities whose Quality Ranking is A- or higher: Sources: fidelity.com, S&P Capital IQ. Another criteria could be Return on Invested Capital. ROIC is a tool used for comparing management effectiveness. While many will look at return on equity or return on assets, ROIC is a more encompassing matrix as it calculates shareholder returns generated by management utilizing all the capital at its disposal – debt and equity. Using the 30 companies above, comparison of 3-yr average ROIC would look like the table below. However, ROIC is only half the equation as it is best to also calculate the weighted average cost of capital WACC to determine the net return, also know as the “hurdle rate”. While American Water Works (NYSE: AWR ) has the largest 3-yr average ROIC at 9.0% and Entergy (NYSE: ETR ) with the lowest at 5.1%, after deducting their WACC, AWR has a Net ROIC of 1.1% and ETR has a -0.2%. Of the above list, the best Net ROIC is generated by small-cap water utilities Artesian Resources (NASDAQ: ARTNA ) and Connecticut Water Service (NASDAQ: CTWS ) at 3.4% and 3.2% respectively. Southern Company at 2.2% outperforms most of its Electric and Multi-utility rivals except WEC Energy (NYSE: WEC ) and SCANA Corp (NYSE: SCG ). Sources: Guiding Mast Investments, Morningstar.com, thatswacc.com. It is important to note the average ROIC for the utility sector is between 4.0% and 4.5%, demonstrating the quality of the above list. Managers at the above listed companies outperformed the sector 3-year average on ROIC by between 20% and 100%. Another method to review utilities is by the regulatory environment in which they operate. Even as an inexact science, the relationship between a utility and the regulatory body controlling its profitability is an important consideration. As the regulatory environment is essential to developing credit ratings for utilities, S&P Credit has a three-level assessment of the regulatory environment by state. Published in 2014, the latest US Utility Regulatory Assessment rates the following states as being “Strong”, compared to “Strong/Adequate”, and “Adequate”: FERC, Wisconsin, Michigan, Iowa, Kentucky, Alabama, Florida, South Carolina, North Carolina, , and Colorado. Only Mississippi and Hawaii were listed as “Adequate” with the balance of the states falling in the middle. S&P believes these nine states and the Federal Energy Regulatory Commission offer improved support for the utilities under their jurisdiction. ITC Holdings (NYSE: ITC ), NextEra (NYSE: NEE ), WEC Energy , MGE Energy (NASDAQ: MGEE ), and SCANA have some of the same positive regulatory environments as Southern Company. Some investors are focused on the income attributes of utility stocks, and the current yield is an important consideration. Various industries within the sector usually offer comparable yields, with Electric utilities historically paying a higher yield and Water utilities offering a bit lighter income. On this basis, the top yielding stocks by industry are Entergy and Southern Company, South Jersey Industries (NYSE: SJI ) and Southwest Gas (NYSE: SWX ) (GAS is being purchased by SO), Avista (NYSE: AVA ) and SCANA , along with Artesian Resources and Middlesex Water (NASDAQ: MSEX ). The table below lists the recent yield by company as offered on Morningstar.com Source: Guiding Mast Investments, Morningstar.com, thatswacc.com. Some investors are looking for stocks that are undervalued, and many investors have their own definition of “undervalued”. One possible criterion could be the difference between the current PE ratio vs it historic PE ratio. Fastgraph.com offers their well-known above/below blue line visualization of this trend, with a black line representing current and a blue line representing a historic PE. The table below lists these stocks and their current relationship to historic PE ratios. For example, ITC is currently trading at a PE ratio of 18.8 when its historic PE is closer to 22.6, for a difference of -3.8. On the other end of the spectrum, the buyout is causing Piedmont Natural Gas (NYSE: PNY ) to trade at a PE of 30.6 vs historic levels of 18.2 for a difference of +12.4. Southern Company is currently trading at its long-term historic PE valuation, and those stocks listed above it in the table has similar, or better, attributes. While it is difficult to answer the original question of other utilities in the same “class” as Southern Company, the five attributes above should allow utility investors to begin their own comparison. Personally, of the list above, I would chose four companies of similar “stature” as Southern Company: ITC Holdings, SCANA Corp, Connecticut Water, and Entergy/NextEra (tie). Author’s Note: Please review disclosure in author’s profile.

Asset Allocation: ‘Scenic Route’ For Fed Should Lend Support To Risk Assets

As we move into 2016, investors are anticipating a period of sustained interest rate increases by the Federal Reserve – not an aggressive climb as sometimes seen in the past, but a mild, steady stroll to modest heights. Meanwhile, Europe and Japan remain on level policy ground, as they look to quantitative easing to maintain recovery and avert further contraction, respectively. Potential turbulence in the form of slowing Chinese growth could make the journey a bit uncomfortable, given that country’s central role in global economic health. Putting all this together, the Neuberger Berman Asset Allocation Committee believes that still-friendly monetary conditions and gradual economic improvement should lend support to risk assets and underscore our preference for stocks over bonds in the coming year. Global Equities: Leaning into Europe We are positive on global equities, particularly in Europe, where stocks stand to benefit from continued quantitative easing and a weaker euro. While we had an overweight view on U.S. stocks just a few months ago in light of reasonable valuations and potential for earnings improvement in 2016, that positioning has moved to neutral given the sharp price recovery in October. However, we see opportunity in master limited partnerships, which, despite near-term concerns around energy prices and the sustainability of distributions, still appear to offer attractive valuations and yields. We are relatively cautious on Japan’s market. Although stocks are benefiting from the weak yen and reallocation of pension fund assets, the country faces slow or negative growth and is vulnerable to a slower Chinese economy. Elsewhere, we have a neutral view of emerging markets, where China volatility, commodity weakness and dollar strength are creating economic headwinds, while corporate profitability remains under pressure. In our view, selectivity from a country and company perspective remains paramount. Fixed Income: Appeal of Spreads We are underweight global fixed income for the coming year given our low return outlook for the large, developed-country sovereign bond markets in light of a trend toward higher rates in the U.S. and easy policy in Europe and Japan. In the U.S., we believe the Fed’s rate normalization will be a dovish process relative to past tightening cycles. A meaningful spike in long-term rates appears unlikely to us, but investors should be prepared for periods of heightened volatility. We maintain a preference for credit based on our outlook for modest economic growth and current attractive spread levels. In particular, we see appeal in high yield, where spreads remain at wide levels due to commodity-related weakness. In our view, credit quality among issues in the rest of the high yield universe remains quite good. Credit fundamentals in emerging markets debt remain relatively strong, in large part due to higher reserve levels and much-improved policymaking over the last two decades. Recent troubles, however, have exacerbated weak growth stemming from soft domestic demand in the major emerging markets. We are neutral on a one-year horizon, but are more constructive further out, as we believe the developed market recovery should lend support to emerging markets’ growth and credit fundamentals. Alternatives: Directional Hedge Funds Could Benefit from Volatility Within alternatives, we now have a slightly overweight stance on directional hedge funds, as increased volatility is creating more opportunities for astute traders and active managers to add value. Within this group, distressed managers have suffered in 2015 from exposure to Puerto Rico, Greece and the energy sector, but we believe there are ample opportunities over a 12-month time horizon. We have a modest overweight view on lower-volatility hedge funds and believe that they continue to play an important role in asset allocations, particularly in an environment of higher volatility and likely rising rates in the U.S. Our view on private equity continues to be neutral in light of its long cycle of growth and more elevated valuations. Elsewhere, we are neutral on commodities – an improvement from six months ago – believing that these markets have come under so much pressure that they are not likely to deteriorate much further. China growth concerns may lend support to precious metal prices, while the drought in many parts of the U.S. should help soft and agriculture commodities. We believe oil is likely to be range-bound, but we anticipate better supply/demand dynamics on the margin. For the broader commodity complex, the potential for higher interest rates and the resulting stress on certain commodity producers may lead to production cuts and more balance across markets. Uncertain Journey We believe elevated uncertainty is likely to accompany investors for much of 2016, whether around future monetary policy, geopolitical events, the price of oil or the extent of slowing growth in China. We will continue to monitor developments as we seek to provide guideposts for the current challenging environment. Market Views Based on 1-Year Outlook for Each Asset Class Regional Focus Fixed Income, Equities and Currency * The currency forecasts are not against the U.S. dollar, but stated against the other major currencies. As such, the forecasts should be seen as relative value forecasts and not directional U.S. dollar pair forecasts. Currency forecasts are shorter-term in nature, with a duration of 1-3 months. Regional equity and fixed income views reflect a 1-year outlook. The Committee members are polled on the asset classes listed above, and these discretionary views are representative of an Asset Allocation Committee consensus. As of fourth-quarter 2015. Views expressed herein are generally those of the Neuberger Berman Asset Allocation Committee and do not reflect the views of the firm as a whole. Neuberger Berman advisors and portfolio managers may make recommendations or take positions contrary to the views expressed. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. About the Asset Allocation Committee Neuberger Berman’s Asset Allocation Committee meets every quarter to poll its members on their outlook for the next 12 months on each of the asset classes noted. The committee covers the gamut of investments and markets, bringing together diverse industry knowledge, with an average of 24 years of experience. This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events may differ significantly from those presented. Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Diversification does not guarantee profit or protect against loss in declining markets. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results. All information as of the date indicated. Firm data, including employee and assets under management figures, reflect collective data for the various affiliated investment advisers that are subsidiaries of Neuberger Berman Group LLC (the “firm”). Firm history includes the history of all firm subsidiaries, including predecessor entities. This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions. The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC. ©2015 Neuberger Berman Group LLC. All rights reserved.

5 Best Performing High Yield Mutual Funds Of 2015

Investors were lured to invest in high yield bond mutual funds following the financial crisis. And why not, as these funds were a better investment destination since there weren’t enough opportunities elsewhere to seek high yields. These funds provided better returns than those investing in securities with higher ratings, including government and corporate bonds. Also, due to their higher yield feature, these funds were less susceptible to interest rate fluctuations. High yield bond mutual funds provide the best choice for those looking to invest in below investment-grade bonds, also known as junk bonds. Talking of junk bonds, it surged an incredible 85% in 2011 since its Great Recession low and continued its winning run. However, in 2015, U.S. junk bonds registered their worst performance since 2008. Rate hike apprehensions throughout the year and finally the lift-off in December dealt a severe blow to these funds. Meanwhile, the weak Chinese economy raised concerns about future demand for oil, eventually dragging global oil prices down. This decline in oil prices also adversely affected junk bond funds. Activist shareholder, Carl Ichan, has tweeted: “Unfortunately I believe the meltdown in High Yield is just beginning.” Under such circumstances, investors may choose to stay away from high-yield mutual funds. Granted that the outlook is bleak, but still if you are a junk bond investor, we have presented those funds that have turned out to be the best gainers in 2015 despite several bottlenecks. These funds also possess a favorable Zacks Rank that should help these funds to continue gaining in 2016 as well. What Went Wrong for High-Yield Mutual Funds? In 2015, the high yield funds category lost an average 4.1%. Anticipation of a rate hike for the first time in nearly a decade and finally the Fed hiking its benchmark interest rates in December had a negative impact on the junk bond market. The Federal Reserve’s easy monetary policy for the last several years, which kept interest rates at record low, had been a boon for the junk bond market. Investors had flocked to this market in search of bigger payoffs. Following the Fed rate hike, net outflows from high-yield bond funds were $3.8 billion in the week ending Dec 16. It marked the third largest outflow on record and the largest since 2014, according to Lipper. During December, net outflows totaled $6.29 billion, higher than November’s net outflow of $3.3 billion. With this outflow, total outflow of high yield bond funds for 2015 came to $13.88 billion, with high-yield funds posting a negative flow in 7 out of 12 months of 2015. The adverse effect could easily be spotted when New York-based Third Avenue Management blocked investors from redeeming money from the near $1 billion Third Avenue Focused Credit Fund (MUTF: TFCVX ) last December. The failure and the embargo on investors on withdrawals also highlighted the concerns related to liquidity in corporate bond markets. The continuous slide in commodity prices also affected junk bond funds. Decline in commodity prices means that energy and material companies may soon have trouble repaying their debts, as they constitute a major portion of the high-yield bond market. Fears about economic slowdown and market volatility in China were instrumental in the plunge in commodity prices. Fed Rate Hike Through 2015, Fed rate hike expectation kept high-yield funds under pressure. Ultimately, on Dec 16, the Fed raised its key interest rate for the first time in nearly a decade. The Fed increased its short-term borrowing rate to a range of 0.25% to 0.50%. Meanwhile, the Fed stressed that the pace of rate hikes will be ‘gradual’ in nature. The junk bond market had been a strong beneficiary of low interest rate and capital had flowed strongly into the debt sector. However, the lift-off spooked investors and they started exiting junk bond positions. Weak Chinese Economy and Oil Price Slump China’s economy and financial markets suffered for a large part of 2015. Economic data remained weak through the year though markets soared during the first half of 2015. Ultimately, markets crashed over a two and a half month period, erasing nearly $5 trillion in value terms. A bubble had built up steadily and valuations had hit levels which were difficult to justify. Weak Chinese economic data raised concerns about decelerating growth in the world’s second largest consumer of oil, which eventually dragged oil prices down. Additionally, persistent supply glut and a stronger dollar also adversely affected oil prices. Price of a barrel of U.S. crude was down more than 30% in 2015 from year-ago levels. Meanwhile, the U.S. economy hardly helped high yield funds in 2015. For the first three months, it expanded at an annual rate of 0.6%. The growth was mostly affected by harsh winter weather and disruptions in West Coast ports. However, the economy picked up pace in the second quarter, gaining 3.9%, but slowed down to a gain of 2% in the third quarter. Best Performing High-Yield Mutual Funds in 2015 In 2015, the junk bond market had a torrid ride due to decreasing liquidity within and rising borrowing costs. Moreover, concerns about junk-rated energy and material companies’ ability to repay debts due to fall in commodity prices continued to weigh on junk bonds. As declines outweighed gains, the funds finishing in the green could post only modest gains. Below we present the best-performing high yield mutual funds of 2015, which are under Zacks Mutual Fund coverage. We have considered those funds that have a minimum initial investment of $5000 and net assets over $50 million. From the above list, we present the top five best-performing high yield mutual funds of last year. These funds also possess a relatively low expense ratio and boast a Zacks Mutual Fund Rank #1 (Strong Buy). The Aquila Three Peaks High Income Y (MUTF: ATPYX ) seeks high current income. ATPYX invests a large portion of its assets in income-producing securities. Its portfolio includes high-yield/high-risk securities rated below investment grade. ATPYX currently carries a Zacks Mutual Fund Rank #1. ATPYX’s 3-year and 5-year annualized returns are 3.6% and 4.8%, respectively. Annual expense ratio of 0.94% is lower than the category average of 1.06%. The Buffalo High-Yield Fund (MUTF: BUFHX ) invests a major portion of its net assets in higher yielding, higher-risk fixed income securities. BUFHX currently carries a Zacks Mutual Fund Rank #1. BUFHX’s 3-year and 5-year annualized returns are 4.1% and 5.2%, respectively. Annual expense ratio of 1.02% is lower than the category average of 1.06%. The Credit Suisse Floating Rate High Income Fund (MUTF: CHIAX ) seeks high current income. CHIAX invests in a diversified portfolio of high yield and high risk fixed income securities (junk bonds). CHIAX currently carries a Zacks Mutual Fund Rank #1. CHIAX’s 3-year and 5-year annualized returns are 2.3% and 4%, respectively. Annual expense ratio of 0.95% is lower than the category average of 1.07%. The Wells Fargo Short-Term High Yield Bond Fund (MUTF: SSTHX ) seeks total return and invests primarily in medium and lower quality corporate debt obligations. SSTHX currently carries a Zacks Mutual Fund Rank #1. SSTHX’s 3-year and 5-year annualized returns are 1.9% and 3.1%, respectively. Annual expense ratio of 0.81% is lower than the category average of 1.06%. The MassMutual Premier High Yield Fund (MUTF: MPHZX ) seeks to achieve a high level of total return and mostly invests in high yield debt and related securities. MPHZX currently carries a Zacks Mutual Fund Rank #1. MPHZX’s 3-year and 5-year annualized returns are 3.8% and 10.1%, respectively. Annual expense ratio of 0.55% is lower than the category average of 1.06%. Link to the original post on Zacks.com